Daily Dose of Optimism

Jim Rogers Moving to China

For those of you who attempt to divine trends by watching what better informed and more successful people than you are doing (as opposed to merely saying), I have an interesting data point for you, and yes, this item is from today (Tuesday), so I should get a little credit for giving you something on time, as opposed to months after the fact:

II.com: Rogers Going Where The Action May Be

Apparently Jim Rogers, who back in 1970s co-founded hedge fund Quantum with George Soros, is leaping into Asia, just as he said he would in March. Rogers, who is also an author of several books, including Investment Biker, reportedly is putting his New York townhouse up for sale and moving to Asia. He bought his not-so-humble six-story digs for $107,000 29-years ago and is asking $15 million. The house has a greenhouse, gym, wine cellar and a view of the Hudson River to die for.

Rogers, according to Bloomberg News, is giving it all up to relocate to the Far East because he expects a boom soon in Chinese stocks. Rogers reportedly is not sure yet where he and his family will settle, but he told Bloomberg News he’s looking for a “Chinese-speaking city” since his child is bilingual in Mandarin and English.

Not mentioned in the Bloomberg article was Rogers' likely desire to avoid rabid Rogers International Raw Materials Fund investors, but that would be some irresponsible speculation!

So there you have it: Rogers says now is the time to start looking at Chinese stocks. Interesting. When I know more about this, I will make sure to position my portfolio accordingly and then write about it for you to copy. (Just kidding).

Rogers' last major accomplishment was the performance of his commodity index, as well as the timeliness of his call (basically, at a 25 year absolute bottom in commodities). The index he designed and launched in 1998 is up 263% since inception (follow link for details).

(Note: I am talking about his INDEX and not his FUND, so if you have issues with the fund, which I understand, we can talk later...)

Also, if you consider yourself a serious investor, but have not read Hot Commodities, or don't already know the price of a bushel of corn, then buy it and read it today. You can thank me later. - Ed

Japanese Interest Rates and US Equity Market Volatility

For those of you wondering why US and global markets experienced such rapid declines over the past month or two, let me draw your attention to some information you may have missed. Basically, the Bank of Japan indicated back in March that it planned to end its zero-interest rate policy.

How do low bond yields overseas affect international markets? Via the mechanism of the "carry trade":

“Carry trading” is not something the average reader is likely to run across in his spare time. What it amounted to was borrowing yen at low interest rates, converting them to dollars and re-investing the money at a higher rate of return. Simple enough in theory, but you need large amounts of money to do it. And it involves a fair amount of risk; while yen lending rates may be low, a rise in the value of the yen could wipe you out. [...] As the real cost of money rises in Japan [via higher interest rates], the yen carry trade stops working. It needs to be “unwound.”

To get a sense of how this works, see current Japanese government bond yields, and compare with US and Brazil. Imagine earning that spread with huge leverage. Here's the explanation of how Japanese liquidity impacted US market volatility (from May 30th):

“The Bank of Japan is signaling an end to its zero-interest-rate policy. Speculators who have been borrowing Japanese Yen are simply racing to the exits,” said Dan Amoss, a commodities expert and contributing editor to The Daily Reckoning.

Amoss believes that traders are dumping assets in hopes to eliminate credit balances in Japan before rising Yen value and spiking interest rates spoil profitable investments. “Speculators are relieving the pressure on their short Yen positions through the liquidation of whatever assets they had been buying.”

A serious depression scare in 1999 caused the Bank of Japan to cut interest rates to zero. Savvy U.S. speculators and hedge funds took out enormous loans from Japanese banks and invested in a variety of international bonds and commodities.

Interesting. A recent headline from Bloomberg (June 15) indicate that the Bank of Japan is backing away from any moves in the near term due to its impact on the Japanese equity markets:

The Bank of Japan kept its key interest rate near zero percent two days after the Nikkei 225 Stock Average sank to the lowest in almost seven months.         

The decision by Governor Toshihiko Fukui and his eight board colleagues, who have signaled since March they're preparing to increase rates, was unanimous, the bank said in Tokyo today.

Markets make big moves on the marginal liquidty created by hot money. For more global impact of this news, see my earlier post on the Saudi Arabian Stock Market Crash. - Ed

Tadawul (Saudi Arabia) Stock Market Crashes; Saudi King Abdullah Plans "Risk-Free Fund"

The Saudi Arabian stock market has been through a spectacular boom-bust cycle driven by a speculative frenzy over the boom in oil prices along with government sanctioned mass participation in the market:

In the past three years, up to nine million Saudis, or half the population, have started playing the market in the conservative desert state, whose strict brand of Islam outlaws standard forms of gambling.

They were encouraged by a government which hoped the bourse would enable citizens to share in the economic boom that has come with a rise in world oil prices not seen since the 1970s. It hoped that would help to iron out some of the country's huge disparities of wealth.

This rosy scenario of shared wealth ended badly after the Saudi Arabian Capital Markets Authority ("CMA") engaged in a ham-handed attempt to regulate speculative excesses:

The March 14 plunge was a severe reaction by speculators when the CMA decided to impose a daily price movement band of 10 percent.

The April 11 crash was a response to the CMA suspending two dealers on suspicions of market manipulation.

The lack of corporate transparency, small-time and first-time investors’ ignorance of the fundamentals of investments, and the long-term phenomenon of unmonitored margin lending by banks were some of the other factors that aggravated the plunge.

The resulting 50% crash produced a pretty ugly looking chart for the Tadawul Market Index:

Market strategists have also theorized that the Saudi crash put pressure on the US markets:

A lot of the selling in the U.S. stock market over the past two weeks was sparked by hedge funds invested in Saudi Arabia, said Jeffrey Saut, market strategist for Raymond James & Associates in St. Petersburg. He said the funds needed to raise cash, but their Saudi positions were illiquid, so they sold U.S. stocks instead.

Saudi investors are understandably upset:

Saudis hit by a recent stock market crash are resorting to car stickers to vent their anger at the wealthy speculators who have been blamed for the decline. The English-language stickers reading "Big Thieves!" show a stock market ticker and the names of some popular listed firms. [...]

The stock market crash, which affected more than 3.5  million middle income investors, has delayed the marriages of many people this summer, Asharq Al-Awsat newspaper reported. Every summer, tens of thousand of Saudis get married but this year, the number is expected to drop by more than 50 percent.

Saudi King Abdullah has a surefire plan:

BBC: Saudi King Plans "Risk-Free Fund" - Saudi Arabia's King Abdullah plans to set up a risk-free investment fund in a bid to attract small investors to the country's flagging stock market.

Saudi citizens will be able to invest up to 500,000 riyals ($133,000; £70,600), in the bourse - buying and selling on the market for two years. The individuals can keep any gains but the state will absorb losses.

King Abdullah did not give a starting date for the scheme - which could attract up to 3 million investors. However he said he was "determined" to implement it.

"The fund will be for people of limited income, employees and others...this group matter most to me," he said. "If they win then this is their luck, with God's will, and if they lose, then their capital is preserved with us," the monarch said.

Ah, it's nice to know oil dollars go to such productive uses. The BBC was kind enough to also note that the mass disruption of a market crash could increase the possibility of repercussions both within and beyond Saudi borders:

"Poverty and unemployment affect terrorism and instability and the king knows the result of this decision, which has important political significance"

I find this all very interesting, and it's suprising how little coverage this got in the US press - so much for those "efficient markets for information" that the internet is supposed to create.  - Ed

Debt & Trade Deficits: The Servant Becomes a Master

Thought for the day:

"This week’s Barron’s cover headline is: “Paying Up! Strapped for cash, U.S. states and cities are selling toll roads to foreign companies willing to pay rich prices.”

The money leaves home a servant; it comes back a master. We buy flat-screen TVs and Chinese tea. The money does our bidding.

But then, the overseas suppliers end up with a net trade surplus over $800 billion a year. What do they do with the money? It comes back to us. They buy our factories, our T-bonds...and now, our roadways.

Now, we are their servants - their clients, their customers, their employees, their debtors, their lackeys, their proles, and their lumpen." (Link)